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The welfare ranking of prices and quantities under noncompliance

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  • Pauli Lappi

Abstract

We study the welfare ranking of an emission tax and emissions trading when firms self-report their emissions to the regulator and may be noncompliant. We allow for the subjective probabilities of auditing and, using conventional assumptions, find that an emission tax produces a higher level of welfare than emissions trading under noncompliance. The main driver of the result is that the compliance pattern of the firms affects the marginal compliance cost (price of emissions) in the case of permits, thus affecting the level of emissions and welfare. The result also holds when enforcement and sanctioning costs are taken into account and differs from the result found by Montero (J Public Econ 85:435–454, 2002 ). We also show that the ranking may be reversed if these costs are taken into account and the regulator must audit at least one firm. We also analyze the welfare ranking when the expected penalties depend on relative violations. Copyright Springer Science+Business Media New York 2016

Suggested Citation

  • Pauli Lappi, 2016. "The welfare ranking of prices and quantities under noncompliance," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 23(2), pages 269-288, April.
    • Handle: RePEc:kap:itaxpf:v:23:y:2016:i:2:p:269-288
    DOI: 10.1007/s10797-015-9356-1
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    Cited by:

    1. Lidia Vidal-Meliá & Carmen Arguedas & Eva Camacho-Cuena & José Luis Zofío, 2022. "An Experimental Analysis of the Effects of Imperfect Compliance on Technology Adoption," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 81(3), pages 425-451, March.
    2. Pauli Lappi, 2017. "Emissions trading, non-compliance and bankable permits," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 24(6), pages 1081-1099, December.
    3. Kuusela, Olli-Pekka & Amacher, Gregory S. & Moeltner, Klaus, 2017. "Enforcing the rules in timber concessions: Performance bonding in the presence of corruption risk," Forest Policy and Economics, Elsevier, vol. 85(P1), pages 52-64.

    More about this item

    Keywords

    Emissions trading; Emission taxes; Compliance; Monitoring; Enforcement costs; Sanctioning costs; H23; Q50; Q58;
    All these keywords.

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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